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doctrine of indoor management (LAW)

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( Author )
14 July 2010

what is doctrine of indoor management?


CMA. CS. Sanjay Gupta

( Expert )
14 July 2010

The doctrine of Indoor management is popularly known as the Turquand’s rule. The rule of Doctrine of Indoor Management is conflicting to that of the principle of Constructive Notice. The latter seeks to protect the company against outsiders; the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the company’s internal machinery is handled by its officers. If the contract is consistent with the public document, the person contracting will not be prejudiced by irregularities that may beset the indoor work of the company.

The Doctrine of Indoor Management lays down that persons dealing with a company having satisfied themselves that the proposed transaction is not in its nature inconsistent with the memorandum and articles, are not bound to inquire the regularity of any internal proceeding. In other words, while persons contracting with a company are presumed to know the provisions of the contents of the memorandum and articles, they are entitled to assume that the provisions of the articles, they are entitled to assume that the officers of the company have observed the provisions of the articles. It is no part of duty of any outsider to see that the company carries out its own internal regulations.

It is important to note that the notice of constructive notice can be invoked by the company and it does not operate against the company. It operates against the person who has failed to inquire but does not operate in his favour. But the doctrine of “indoor management” can be invoked by the person dealing with the company and cannot be invoked by the company.


Ankur Garg

( Expert )
14 July 2010

Doctrine of indoor management

As per the Doctrine of Indoor Management if a person, who has satisfied himself that a proposed dealing is not in the nature inconsistent with the Memorandum and Articles of Association of the company is not bound to make a further enquiries and is entitled to assume that all the due internal procedures to render the transaction binding on the company have been followed.

This Doctrine is also termed as 'Turquand Rule' and was enunciated in the famous and leading case of Royal British Bank v Turquand in 1856.

It provides a shelter and protection to the outsiders dealing with the company that are, in no way, bound to judge the regularity of the internal procedures of a company.

The doctrine of indoor management may be summarised as:

"While a person dealing with a company is presumed to have read the public documents and understood their contents and made sure that the transactions are not inconsistent therewith, he is also entitled to assume that the provisions of the Articles have been observed by the officers of the company. It is no part of the duty of an outsider to see that company has carried out its indoor internal proceedings (or indoor management)."


Regards


Ankur Garg

( Expert )
14 July 2010

Let me give you an example if you want to give loan to the company, you to make the following investigations:

1. Check the authorisation in articles and memorandum of the company
2. Check if there is any special procedure in the company before accepting the loan
3. Check all the formalities have been complied by the company
4. No authority restrict the company to take loan from you.

If after making the above investigation you give loan to the company, then this doctrine protects you against the company’s fraud. In other words what is going on inside the board room is not your duty to investigate. You are safe if you entered the transaction after reasonable investigation as mentioned above.

Revert if there is any doubt.

Thanks


CMA. CS. Sanjay Gupta

( Expert )
14 July 2010

Exceptions To The Rule
The rule of doctrine of indoor management is however subject to certain exceptions. In other words, relief on the ground of ‘indoor management’ cann’t be claimed by an outsider dealing with the company in the following circumstances:
Ø Where the outsider has knowledge of Irregularity
Ø Suspicion of Irregularity
Ø Forgery
Ø Representation through Articles
Ø Acts outside apparent authority

1. Knowledge of Irregularity: - The first and the most obvious restriction is that the rule has no application where the party affected by an irregularity had actual notice of it. Knowledge of an irregularity may arise from the fact that the person contracting was himself a party to the inside procedure. As in Devi Ditta Mal v The Standard Bank of India[9], where a transfer of shares was approved by two directors, one of whom within the knowledge of the transferor was disqualified by reason of being the transfer himself and the other was never validly appointed, the transfer was held to be ineffective.

Similarly in Howard v. Patent Ivory Manufacturing Co[10]. where the directors could not defend the issue of debentures to themselves because they should have known that the extent to which they were lending money to the company required the assent of the general meeting which they had not obtained. Likewise, in Morris v Kansseen[11], a director could not defend an allotment of shares to him as he participated in the meeting, which made the allotment. His appointment as a director also fell through because none of the directors appointed him was validly in office.

But after the Hely-Hutchinson v Brayhead Ltd[12]., according to which the mere fact that a person is a director does not mean that he shall be deemed to have knowledge of the irregularities practiced by other directors. A newly appointed director does not mean that he shall be deemed to have knowledge of the irregularities practiced by the other directors. A newly appointed director entered into contracts of indemnity and guarantee with the company through a director whom the company had knowingly allowed to hold himself out as having the authority to enter into such transaction, although in fact he had no such authority. The company was held liable.

2. Suspicion of Irregularity: - The protection of the “Turquand Rule” is also not available where the circumstances surrounding the contract are suspicious and therefore invite inquiry. Suspicion should arise, for example, from the fact that an officer is purporting to act in matter, which is apparently outside the scope of his authority. Where, for example, as in the case of Anand Bihari Lal v. Dinshaw & co[13]., the plaintiff accepted a transfer of a company’s property from its accountant, the transfer was held void. The plaintiff could not have supposed, in absence of a power of attorney, that the accountant had authority to effect transfer of the company’s property.

Similarly, in the case of Haughton & co v. Nothard, Lowe & Wills Ltd[14]., where a person holding directorship in two companies agreed to apply the money of one company in payment of the debt to other, the court said that it was something so unusual “that the plaintiff were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it.” Any other rule would “place limited companies without any sufficient reasons for so doing, at the mercy of any servant or agent who should purport to contract on their behalf.”

3. Forgery: - Forgery may in circumstances exclude the ‘Turquand Rule’. The only clear illustration is found in the Ruben v Great Fingall Consolidates[15]; here in this case the plaintiff was the transferee of a share certificate issued under the seal of the defendant’s company. The company’s secretary, who had affixed the seal of the company and forged the signature of the two directors, issued the certificate.

The plaintiff contended that whether the signature were genuine or forged was apart of the internal management, and therefore, the company should be estopped from denying genuineness of the document. But, it was held, that the rule has never been extended to cover such a complete forgery.

Lord Loreburn said: “It is quite true that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they have no notice. But, this doctrine which is well established, applies to irregularities, which otherwise might affect a genuine transaction. It cannot apply to Forgery.”

4. Representation through Articles: - The exception deals with the most controversial and highly confusing aspect of the “Turquand Rule”. Articles of association generally contain what is called ‘power of delegation’. Lakshmi Ratan Lal Cotton Mills v J.K. Jute Mills Co[16]. explains the meaning and effect of a “delegation clause”.

Here one G was director of the company. The company had managing agents of which also G was a director. Articles authorised directors to borrow money and also empowered them to delegate this power to any or more of them. G borrowed a sum of money from the plaintiffs. The company refused to be bound by the loan on the ground that there was no resolution of the board delegating the powers to borrow to G. Yet the company was held bound by the loans. “Even supposing that there was no actual resolution authorizing G to enter into the transaction the plaintiff could assume that a power which could have been delegated under the articles must have been actually conferred. The actual delegation being a matter of internal management, the plaintiff was not bound to enter into that.”

Thus the effect of a “delegation clause” is “that a person who contracts with an individual director of a company, knowing that the board has power to delegate its authority to such an individual, may assume that the power of delegation has been exercised.”

The question of knowledge of Articles came up in the case of Rama Corporation v Proved Tin and General Investment Co.[17], here; one T was the active director of the defendant company. He, purporting to act on behalf of his company, entered into a contract with the plaintiff company under which he took a cheque from the plaintiffs. The company’s article contained a clause providing that “the directors may delegate any of their powers, other than the power to borrow and make calls to committees, consisting of such members of their body as they think fit”. The board had not in fact delegated any of their powers to T and the plaintiffs had not inspected the defendants articles and, therefore, did not know of the existence of power to delegate.

It was held that the defendant company was not bound by the agreement. Slade J’, was of the opinion that knowledge of articles was essential. “A person who at the time of entering into a contract with a company has no knowledge of the company’s articles of association, cannot rely on those articles as conferring ostensible or apparent authority on the agent of the company with whom he dealt.” He could have relied on the power of delegation only if he knew that it existed and had acted on the belief that it must have been duly exercised.

Knowledge of articles is considered essential because in the opinion of Slade J; the rule of ‘indoor management’ is based upon the principle of estoppel. Articles of association contain a representation that a particular officer can be invested with certain of the powers of the company. An outsider, with knowledge of articles, finds that an officer is openly exercising an authority of that kind. He, therefore, contracts with the officer. The company is estoppel from alleging that the officer was not in fact authorised.

This view that knowledge of the contents of articles is essential to create an estopped against the company has been subjected to great criticism. One point is that everybody is deemed to have constructive notice of the articles. But Slade J brushed aside this suggestion stating constructive notice to be a negative one. It operates against the outsider who has not inquired. It cannot be used against interests of the company. The principle point of criticism, however, is that even if the directors had the power to delegate their authority. They would not yet be able to know whether the director had actually delegated their authority. Moreover, the company can make a representation of authority even apart from its articles. The company may have held out an officer as possessing an authority. A person believes upon that representation and contract with him. The company shall naturally be estopped from denying that authority of that officer for dealing on its behalf, irrespective of what the articles provide. Articles would be relevant only if they had contained a restriction on the apparent authority of the officer contained.

5. Acts outside apparent authority: - Lastly, if he act of an officer of a company is one which would ordinarily be beyond the power of such an officer, the plaintiff cannot claim the protection of the “Turquand rule” simply because under the articles power to do the act could have been delegated to him. In such a case the plaintiff cannot sue the company unless the power has, in fact, been delegated to the officer with whom he dealt. A clear illustration is Anand Behari Lal v Dinshaw[18] here the plaintiff accepted a transfer of a company’s property from its accountant. Since such a transaction is apparently beyond the scope of an accountant’s authority’ it was void. Not even a ‘delegation clause’ in the articles could have validated it, unless he was, in fact, authorized.


S And V

( Author )
14 July 2010

Thanks


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